COURT FILE NO.: 11-50314
MOTION HEARD: March 6, 2014
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: 417 Infiniti Nissan Limited v. Nissan Canada Inc.
BEFORE: MASTER MACLEOD
COUNSEL: Shaun Laubman, for the Plaintiff
William Scott, for the Defendant
REASONS FOR DECISION
[1] This is a motion by the defendant seeking further production from the plaintiff. It is unfortunate that this motion has resulted in a delay in the schedule established for this proceeding in December of 2013. The intention had been that the trial of the action would begin on November 24th, 2014. Whether that will still be possible remains to be seen.
[2] I assume the parties wished the court to take the issues seriously or they would not have spent the time and the money to bring this motion, file extensive materials and to argue the motion. As such I reserved to review the materials and to carefully consider the issues. Unfortunately the need to do so has occasioned more delay.
[3] I have approached the matter in the following way. Firstly I have considered if the requested documents are relevant. Secondly I have tried to assess whether the request is reasonable and proportionate given the issues in dispute and the timing of the motion. Thirdly I have attempted to assess the evidence suggesting the information has already been provided, cannot be provided, does not exist or is not in the control of the witness or the party. The reasons that follow detail my conclusions. I have also had occasion to comment on the lack of a discovery plan and the difference that a properly crafted plan might have made to the use of court resources and the cost to the litigants.
Background and Context
[4] To understand the motion, it is necessary to understand the litigation. The plaintiff, ("417") is a corporation which operates a Nissan and Infiniti dealership at 1599 Star Top Rd. in Gloucester. It is a franchisee of the defendant, Nissan Canada Inc. ("NCI"). Though the plaintiff continues to be a Nissan and Infiniti dealer, a dispute has arisen between 417 and NCI. That dispute has given rise to this litigation in which 417 seeks over $11 million in damages.
[5] For purposes of the motion, there are two principal complaints giving rise to this claim. At the risk of oversimplifying, the first of these relates to the construction of the dealership in its current configuration. Almost 10 years ago NCI implemented new standards for its network of automobile dealerships and under this program it required 417 to renovate and expand its premises. The plaintiff asserts that NCI erroneously required it to build too large a facility and when 417 objected, the defendant misrepresented anticipated sales volumes. The consequence was increased construction cost, delay in completion and higher than necessary carrying and operating costs. I will refer to this as the "overbuilding claim".
[6] The second complaint is about decisions leading up to establishment of a competing Nissan dealership in Orleans. The plaintiff asserts that firstly NCI's decision to establish another dealership in Ottawa was wrongful and in breach of contract. To compound this problem, the plaintiff asserts that after deciding to open up another "dealer point" NCI then promised 417 would be awarded the new dealership and could locate it in a new automall that 417 was involved in creating near Mer Bleu. This is not what occurred. Rather NCI awarded the new dealership to a competitor. I will refer to this as the "competing dealership" claim.
[7] The combined damages for the overbuilding claim and for the competing dealership claim are approximately $11 million. 417 accuses NCI of misrepresentation, breach of contract, breach of the Arthur Wishart Act and lack of good faith. The parties have been in litigation since 2011.
[8] In May of 2013, 417 set the action down for trial. Pursuant to Rule 48 this involves certifying that the matter is trial ready and there are no outstanding discoveries or discovery issues. Consequently a pre-trial under Rule 50 was scheduled and took place on December 18th, 2013. In advance of that pre-trial, the plaintiff served an expert report. This is the damage calculation completed by Charles L. Seguin, C.A. It contains the quantification of both the overbuilding claim and the competing dealership claim. The defendant did not serve a responding report at that time. It did however attempt to bring a motion for relief similar to that sought in this motion. At the same time the plaintiff advised it wished to amend its claim to increase the amount sought as damages and to add certain additional particulars.
[9] At the pre-trial, Master Roger set the trial date and established a timetable for inter alia bringing this motion. He made an order permitting the plaintiff to amend the statement of claim, providing a deadline for amending the defence, updating productions, for additional discovery and he set the date for this motion. He had of course assumed that the parties would do their best to resolve any remaining discovery issues and that the issues would be narrowed.
[10] On February 12th, 2014 the defendant obtained a report from Gregory C. Hocking, CPA at BDO Canada LLP which was a review of the Seguin expert report. That letter sets out extensive requests for information. These are the requests that are central to the motion. It should be noted however that the letter was attached as an exhibit to the affidavit of Melissa Arruda who is a lawyer at McCarthy Tetrault LLP and Mr. Hocking did not swear an affidavit. As such he could not be cross examined and his assertion that he cannot properly carry out his task without that information could not be directly challenged.
[11] Certain issues raised by the motion as originally drafted were resolved or the issues narrowed either because the plaintiff has agreed to make further productions or the defendant has dropped the demand set out in the original motion.
[12] I turn to the issues that were argued.
Construction Documents
[13] The Seguin report breaks down the overbuilding damages into several components. One of those is entitled "excess construction costs". To determine the additional cost of building the dealership to the size requested by NCI compared with the hypothetical cost of building a smaller building, the report relies on a report prepared by Daniel Louks Quantity Surveying. The Louks report concludes that it cost roughly $1 million extra to build the larger building.
[14] Daniel Louks may be a quantity surveyor but he is also the construction manager who actually oversaw the construction. Thus he is familiar with the actual cost of construction although of course his view of what it would have cost to build a smaller facility is an opinion. The plaintiff has produced the Louks report. The request by the defendant is for production of all documents relevant to the actual construction costs and the timing of the construction. Included in this request are all budgets, construction management agreements, construction schedules, correspondence and invoices.
[15] There is no doubt that the cost of construction is relevant since this forms part of the damage claim. The time required to complete the facility is also relevant because lost profits are claimed for the extended construction schedule. The problem I am faced with is that Mr. Giacomin in his responding affidavit swears that "included in the two binders of documents recently produced" 417 has produced all relevant documents in this category. Notwithstanding that evidence, Mr. Scott still seeks an order for all documents in the possession or control of Daniel Louks relating to renovation of 417 between 2007 and 2010.
[16] There seems to have been no effort made to assess whether the recent productions from 417 are all of the information required. Similarly however there appears to have been no effort made to determine what if any documents Mr. Louks has or may have consulted that 417 does not have or has not produced. To be clear about this, given the nature of the damages claimed, the defendants ought if necessary to have access to the entire construction file and certainly to any documents which Mr. Louks reviewed or could have reviewed in preparing his report.
[17] This component of the claim is less than 10% of the total but it is still a significant claim by itself and it gives rise to a multiplier since there are also damages claimed for additional financing and carrying costs. The plaintiff is therefore to contact Mr. Louks to determine what documents he may have that the plaintiff has not already produced and the plaintiff is also to advise the defendant whether it has itself retained construction documents that have not been produced.
[18] Though I would therefore grant an order to the defendant for disclosure of the documents and provide the defendant with the right to inspect those documents, the defendant is nevertheless required to work with the plaintiff to determine what documents are really required for the purpose of the litigation. It is unreasonable to run up costs and create delay by reviewing every document in minute detail. The objective of the exercise is to assess the plaintiff's claim for damages.
[19] Claims based on construction costs and claims based on construction delay are frequently document intensive since analysis of the entire project including cash flow, wasted costs, extra costs, timetables, sequencing of work and repair and remedy of construction deficiencies may all be relevant to assessing what was done and comparing it with what might have been if different choices had been made. The problem is that production and review of entire construction files maintained by both the owner and the construction manager is frequently time consuming and expensive. Whether the defendant wishes to run up costs inspecting every invoice and every other document in a construction file requires consideration of proportionality, efficiency and common sense. Once all of the relevant documents have been reviewed, it is frequently the case that there are only a handful of truly important documents necessary to adjudicate the issue before the court.
[20] In this case the documents requested are only relevant to challenging the damage estimate of Mr. Louks which is incorporated into the Seguin report. The issue is whether or not it cost 417 an extra million dollars to overbuild the facility and whether or not the renovations would have been completed significantly sooner had the renovation been less ambitious. The defendant should bear this in mind. On the other hand, it is difficult to assess what documents should be examined if the existence of the documents has not been fully disclosed.
[21] This is an example of an issue that should have been avoidable with proper discovery planning. The plaintiff should have been forthcoming with what documents it had and the defendant should have been purposeful in seeking focused targeted disclosure. Of course it would have aided such an exercise if the plaintiff had disclosed its calculation of damages at the outset of the litigation and not over two years after the litigation was commenced.
[22] In summary, the plaintiff is to disclose what if any construction related documents it has in its possession that it has not already disclosed. It is also to determine what potentially relevant documents are in the possession of Mr. Louks and specifically whether Mr. Louks has documents other than copies of those in the possession of the plaintiff. Counsel for the defendant shall then work with counsel for the plaintiff to determine what documents it is necessary to review applying the principles of proportionality and efficiency. If the defendant is employing a construction expert then it may be useful to have the expert work directly with Mr. Louks.
Production from related corporations
[23] 417 is a corporation with two shareholders which are themselves corporations. Paul Giacomin and Brent McKinlay are the directors of 417 and Mr. Giacomin is the President and General Manager. Of the two shareholders, 2016520 Ontario Inc. is owned by Mr. Giacomin and his wife. Quarry Park II Capital Corporation is owned by Brent McKinlay and his father Fred McKinlay.
[24] The land on which the dealership is located is owned by another corporation known as Quarry Park Capital Corporation ("Quarry Park" for purposes of the motion) and is leased by 417. According to the 417 financial statements, Quarry Park has the same ownership structure as Quarry Park II. Thus the landlord is a related party and the relationship is not arms length.
[25] The plaintiff has produced to the defendant copies of its financial statements and corporate tax returns. Of course NCI has access to this information in any event because of the relationship of franchisor and franchisee. 417 has also agreed to produce further breakdowns such as the profit and loss statements relating to Infiniti sales.
[26] The defendant now seeks financial statements and corporate tax returns for each of the two shareholder corporations and for the landlord. This is not information to which NCI would ordinarily be entitled. The question is whether 417 can be required to obtain and produce this information or at least whether Mr. Giacomin who was the discovery witness should be ordered to produce the information that is in his possession, power or control and to make the request to Mr. McKinlay. In that event, should Mr. McKinlay refuse then the defendant could bring a motion to compel the non parties, Quarry Park II and Quarry Park to produce the necessary information.
[27] In the circumstances of this litigation, there can be little doubt there is relevance to the flow of funds from 417 to its landlord and to its shareholders. To be clear, the plaintiff is only 417 and neither its shareholders nor any related corporation has claimed damages. The losses claimed in the litigation are solely losses allegedly incurred by 417 which is of course at law a distinct legal entity. If there were no contracts between 417 and related corporations and no funds relevant to the calculation of damages flowing between them then that would be the end of the question but that is not the case. 417 claims increased operating costs and it also claims losses of profits. Since money is flowing between 417 and the related corporations in circumstances in which the governing minds of 417 can control both ends of the transactions, the legitimacy of those transactions is put in question. Equally the question of whether losses claimed by 417 are real losses may require analysis of what funds are held by the related corporations. This is not a question of piercing the corporate veil or opening up the affairs of related corporations to scrutiny just because 417 is suing, it is a question of following the money.
[28] The relationship with the related corporations is pleaded in the statement of defence as is the artificiality of the damages claimed by 417. There is no doubt that the related party transactions are relevant to the litigation. BDO states in its letter that it requires copies of the related corporations financial statements and tax returns for 2006 to 2012 to properly understand the transactions between 417 and these parties. The letter also states that BDO requires copies of management contracts, loan documentation and other documents which support those fees, loans or other inter party transactions. I agree with this. The financial statements and tax returns are relevant as are documents supporting inter corporate loans, guarantees, service contracts or other transactions that may impact on the profits and losses of 417.
[29] Because these are all separate corporate entities, they have their own legal rights of course. There may be shareholders or other participants whose privacy is impacted by disclosure in this litigation and who may wish to take a position on what should be disclosed and on what terms. It may be for example that certain portions of the financial statements or the tax returns could be redacted as they are not germane to the issues in the litigation. Mr. Giacomin himself has control over certain of the documents but presumably it is Mr. McKinlay that would have access to the Quarry Park documents.
[30] The plaintiff is to produce copies of any inter company agreements which are relevant to the profit and loss position of 417. The plaintiff is also directed to request the shareholder corporations and the landlord to produce copies of their financial statements and tax returns for the use of BDO in conducting its analysis of the Seguin report. Counsel are invited to agree on the terms under which those documents ought to be produced and the use that may be made of them. In the event the related corporations refuse to produce the documents voluntarily or there is no agreement on terms then the defendant may bring motions on notice to those corporations seeking production pursuant to Rule 30.10.
[31] At the end of these reasons I will have comments in regard to the lack of a discovery plan. This is the kind of issue that should have been readily anticipated between counsel as soon as the basis for calculation of damages was determined. Perhaps a meeting between counsel and their experts might have been necessary but it should have been evident that an accountant hired by the defendants would require information from the related parties who in part control the extent of 417s profits and losses. The extent of the required disclosure and the terms on which it would be provided should have been worked out at an early stage or a motion or case conference could have been brought to resolve the situation in advance.
Mcgiac Realty Corporation & 417 KIA
[32] This corporation was apparently been incorporated more recently. It appears to be controlled by Mr. McKinlay and Mr. Giacomin and is related to the land assembly for the Mer Bleu auto mall. There are now loan guarantees between the corporations and funds advanced to Mcgiac by 417 including an advance of $1.9 million. The financial relationship between Mcgiac and 417 during the period when losses are claimed by 417 is relevant. Thus the financial statements and management contracts remain relevant and are to be produced on the same terms as those ordered above for the landlord and the shareholders for the period during which profits and losses to 417 are claimed.
[33] A similar situation exists with 1457913 Ontario Inc. ("417 Kia"). This is also a related corporation and there are intercompany obligations. As with Mcgiac, those transactions are relevant to the extent that they could have any impact on the calculation of profits by 417. With respect to both of these corporations, counsel are to confer with the expert from BDO and their own accountants if necessary to seek to devise a process and terms of disclosure without the need for further motions. In the event that these corporations are not under the control of Mr. Giacomin and additional motions are necessary on notice to the corporations they are to be brought promptly.
The Mer Bleu land assembly
[34] The plaintiff has abandoned any claim for losses arising out of the land assembly for the Mer Bleu auto mall. Notwithstanding that 417 was not granted the Orleans franchise for a Nissan dealership and notwithstanding the fact that the new dealership was not located in the Mer Bleu auto mall, the land assembly went ahead and it is expected that 417 through Mcgiac will make a profit and not a loss on the purchase of the land. Since there is no claim for damages, the question of the value of the land and the sale of that land if and when it occurs is not directly relevant.
[35] Abandoning any claim for losses on the acquisition of the land however is not the end of the story. The plaintiff resists production of documents relating to the land assembly but it has not abandoned the allegation that it entered into the agreement to secure the land on the basis of misrepresentations made by NCI. To the contrary, the amendments to the pleading made in December, added the allegation that 417 "also secured land for the new dealership based on the commitment made by NCI's representatives". As this allegation was added to the amended pleading, the plaintiff clearly alleges this as a material fact. Whether or not the evidence supports the allegation of reliance is therefore appropriately explored on discovery.
[36] This brings into focus the timing of the decision to enter into the land acquisition and the reasons for doing so. Thus the defendant must be at liberty to explore when the idea for the land acquisition was developed and when steps were first taken to do so as well as the decision to continue with the land development once the dealership was awarded to a competitor at a different location. A party cannot plead that it entered into a transaction in reliance upon a misrepresentation and then refuse to answer questions about it.
[37] Accordingly though the post-acquisition development of the automall and the ultimate value of the land is not in issue, the reasons for the land acquisition and what was foreseen at the time will be. The defendant is entitled to explore the allegation added to the pleading and the plaintiff is required to both answer the questions and to produce relevant documents tending to prove or discredit the allegation of reliance set out in the amended pleading.
Production from the accountants
[38] The defendant seeks an order that the plaintiff direct Welch LLP be directed to produce all documents in its possession relating to the transfer of leasehold improvements to the landlord. Apparently 417 was carrying certain leasehold improvements on its books but in order to meet certain requirements of NCI it was decided to move the leaseholds to the landlord's balance sheet and then to incorporate the price into the lease. The monthly lease payments were then adjusted. This issue has been explored on the discovery and various documents have been produced. It is of course a perfect example of how non arms length companies can move assets and liabilities around and alter their balance sheets.
[39] Welch is the accountant for the landlord and it appears from 417's financial statements that Welch is also the accountant for 417. The defendant is seeking documents from Welch relating to the adjustment of the leasehold improvements. Specifically BDO notes that the annual rent expense calculated in a memo from Welch that has been produced does not reconcile with the amount actually used in the renegotiated lease. BDO thus assumes there was an additional analysis completed by Welch.
[40] I agree that if Welch has further analyses or memos commenting on the restructuring or contemplating different scenarios, those are relevant documents. It is not clear whether such analyses were prepared for Quarry Park or for 417 or for both jointly though Mr. Giacomin deposes that Welch did not give advice to 417. Nevertheless the plaintiff is to make the request of Welch and if Welch cannot release the documents without permission of Quarry Park, the plaintiff is to request Quarry Park to release them. If Quarry Park refuses then a motion may be brought on notice to Quarry Park.
List of Witnesses
[41] The discovery rules in Ontario provide that on discovery a party must disclose the names and contact information for any person who may reasonably be expected to have relevant knowledge of the transactions or occurrences in issue. The jurisprudence has expanded this to include a summary of the evidence each such person may be able to give. This obligation to answer questions about the identity and knowledge of potential witnesses potentially intrudes on an area otherwise covered by litigation privilege but the rule is clear. There should be no room for a dispute about the obligation to answer questions under Rule 31.06 (2).
[42] Disclosure of potential witnesses is not the same thing as identifying who a party intends to call at trial. That is a separate obligation. It is a reasonable discovery question to ask the opposing party on what evidence they intend to rely to prove a particular proposition. In addition to that there is an obligation to provide the other party and the court with a list of proposed witnesses at the time of the pre-trial and to estimate how long each witness will be in chief and in cross examination. Furthermore it is routine that the presiding judge or master will order the parties to exchange lists of witnesses and summaries of their evidence or even signed witness statements in advance of the trial.
[43] During the motion it was agreed there should be a mutual order directed to both parties that they exchange lists of witnesses and summaries of evidence at least 30 days prior to the opening of trial. This disposes of the issue.
Lack of a discovery plan
[44] Rules 29.1 and 29.2 require that early in the litigation and on an ongoing basis counsel are to meet and confer in order to plan for effective, efficient and proportionate production and discovery. This is intended to be a collaborative rather than an adversarial exercise. The objective is to avoid unnecessary discovery costs and delays caused by discovery and production disputes.
[45] For discovery planning to be effective in achieving its objective the parties must approach the needs of the action with clarity, common sense and good faith. It requires the parties to think clearly about what is really in issue in the litigation and about the evidentiary needs of the case considered from both the position of the plaintiff and the defendant.
[46] The plaintiff complains that the defendant is abusing the discovery process and needlessly seeking broad categories of documents many of which are the same or substantially the same as the requests that were already answered. This impatience and frustration with the requests made by the defendant is set out in Mr. Giacomin's affidavit sworn in opposition to the motion. He goes on to opine that the majority of the latest requests are irrelevant to the issues and to the claim for damages. Even ignoring the fact that these opinions by Mr. Giacomin have no place in an affidavit which is supposed to be deposing to facts, this is a troubling response to requests by the defendant's accounting expert for access to information he asserts he requires.
[47] The plaintiff in this case did not fully articulate its theory of damages until it delivered the Seguin report in July of last year. Given the assumptions made or accepted by Mr. Seguin and the quantum of the damages, it should have been obvious that there would be a requirement for complete financial disclosure, that the defendant would have the right to challenge the assumptions and that the defendant would be requesting its own accountants to evaluate the damage report. It was inevitable this would give rise to further requests for specific information. This was then compounded by a pleading amendment in December which opened further areas for discovery and production.
[48] It is unfortunate that the defendant waited until February of 2014 to obtain a report from its own expert. It is more unfortunate that the report deals primarily with the information the defendant's expert requires in order to complete a critique of the Seguin report. In other words the defendant's expert cannot begin to prepare his report for use at trial until he either gets that information or it is determined he does not truly need it.
[49] Protracted discovery and disputes over production are frequently the result of what might be described as evolutionary litigation. If the theory of the case changes, the calculation of damages remains hypothetical until late in the day, if there are pleading amendments post discovery then it is difficult to deny a defendant the right to additional discovery and further production.
[50] At least in theory, if the parties had been more open and forthcoming about the production and discovery issues early in the process, if they had actively involved their experts in seeking streamlined and focused requests for information and had they faced up early to the need to protect the interests and privacy of the non-party related corporations they might have avoided this lengthy motion. If they continue to resist disclosure on the one hand and to insist on full access to the records of non-parties on the other then further motions appear inevitable.
[51] I am not prepared to refuse relief because of the lack of a plan. Nor am I primarily engaged in a fault finding mission. My point is simply that both parties bear responsibility for finding themselves locked in protracted discovery motions on what is supposed to be the eve of trial. There is an upcoming case conference with Master Roger at which the timetable will have to be reviewed and reconsidered in light of the outstanding production and discovery issues.
Conclusion
[52] In summary, for the reasons outlined above, the court orders as follows:
a. The plaintiff is to advise the defendant what if any construction related documents it has in its possession that it has not already disclosed. It is also to determine what documents are in the possession of Mr. Louks that are additional to those in the possession of the plaintiff.
b. Counsel for the defendant shall have the right to production and inspection of the additional construction documents but is to apply the principles of proportionality and efficiency in exercising that right. If the defendant is employing a construction expert then the plaintiff may authorize Mr. Louks to work directly with the expert.
c. The plaintiff is to produce the information it has undertaken to produce in the affidavit of Mr. Giacomin.
d. The plaintiff is to produce the financial statements and tax returns for the related corporations over whose records 417 or Mr. Giacomin have possession or control to the defendant's accounting expert. If agreeable to the expert, irrelevant and confidential information may be redacted.
e. The plaintiff is also to request the same information from the corporations controlled by Mr. McKinlay on the same basis and if any such corporation refuses to provide the information the defendant is at liberty to bring a motion under Rule 30.10.
f. The plaintiff is to request the release of the requested information from Welch LLP and to request the consent of any other corporation or individual whose consent is necessary for release of that information. Again if consent is not forthcoming, if necessary, the defendant may move under Rule 30.10.
g. Immediately on receipt of this endorsement counsel are to confer with a view to revising or creating a plan for completion of all remaining discovery and production steps and in an attempt to resolve all outstanding and anticipated discovery or production disputes. This is to be done prior to the currently scheduled case conference.
h. The parties are also to seek consensual resolution of the costs of this motion. If the parties are not able to resolve the question of costs then they may approach my office for further direction within 30 days failing which there will be no order as to costs.
Master MacLeod
DATE: June 18th, 2014